I’ve posted Entry #369 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Biggest Problem With Buy-and-Hold Is All the Questions It Takes Off the Table.

Juicy Excerpt: Buy-and-Hold is more than a strategy. It is a model for understanding how stock investing works. The core idea is that the future performance of stocks cannot be known. Believing that takes all sorts of questions off the table. Investors who come to believe that of course make strategic decisions based on their beliefs. And each strategic decision taken increases the investor’s emotional attachment to the underlying belief. To question the belief in one circumstance would require questioning whether many prior strategic choices were well-founded or not. Buy-and-Hold is a self-reinforcing sets of beliefs about how the stock market works.

I’ve posted Entry #368 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Price Booms Rarely Lead to Stock Price Crashes.

Juicy Excerpt: Valuations tell us a lot about how the  u.s market works. But they do not tell us everything. Investors hoping to use an understanding of valuations to enhance their long-term investing results need to be as aware of the limitations of valuation analysis as much as they need to be aware of its power.limitations

I’ve posted Entry #367 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Shiller Revolution Summed Up in Two Sentences.

Juicy Excerpt: Sometimes when I am ready to leave for an appointment five minutes before I need to leave, I will pull Irrational Exuberance off the bookshelf and turn to a random page and see what I find there. I did that the other day and these are the words that jumped out at me off of Page 254: “The U.S. stock market ups and downs over the last century have made virtually no sense ex post. It is curious how little known this simple fact is.”

Um — Okay. What do we do with that?

I’ve posted Entry #366 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Investors Who Lower Their Return Expectations At Times of High Valuations Should Lower Allocations Too.

Juicy Excerpt: Bogle stated on Page 33 of his book Common Sense on Mutual Funds that: “This analysis takes into account my conviction both that the performance of individual securities is unpredictable, and that the performance of portfolios of securities is unpredictable on any short-term basis. While the long-term performance of portfolios is also unpredictable, a careful examination of the past returns can establish some probabilities about the prospective parameters of return, offering intelligent investors a basis for rational expectations about future returns.”

That’s not Buy-and-Hold! That’s Valuation-Informed Indexing!

I’ve posted Entry #365 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stocks Have Been Performing Poorly For a Long Time But Most of Us Haven’t Noticed.

Juicy Excerpt: From January 1, 2000, through December 31, 2016, the annualized real return on stocks was 2.25 percent. That’s not good. That’s poor performance. 17 years of it.

Investors who don’t adjust their expectations of stock performance to reflect valuations were expecting annual returns of something in the neighborhood of 6.5 percent real during that 17-year time-period. The fact that real-world returns came up so far short of expectations means that those millions of people have less to spend on cars than they would have had their expectations been more realistic. And less to spend on clothing. And less to spend on eating out. And on everything else. Our entire economy takes a big hit when stocks produce such underwhelming results for such an extended period of time.

We all save less too, of course. Most of us think of our paychecks as the source of our savings. But the reality is that a large percentage of our savings is the return we obtain on money we saved from earlier paychecks and invested in stocks. The compounding returns phenomenon really is the eighth wonder of the world for middle-class people seeking a decent retirement. When stock returns dry up, annual additions to accumulated wealth slow down dramatically for most of us. When stocks perform poorly for 17 years running, we all fall behind on our efforts to achieve our most important long-term financial goals.

I’ve posted Entry #364 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called How a Small Minority of Investors Controls What We All Believe About How the Stock Market Works.

Juicy Excerpt: Taleb writes: “It suffices for an intransigent minority –a certain type of intransigent minorities –to reach a minutely small level, say three or four percent of the total population, for the entire population to have to submit to their preferences. Further, an optical illusion comes with the dominance of the minority: a naive observer would be under the impression that the choices and preferences are those of the majority.”

I’ve posted Entry #363 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Some Moderate Thoughts About Safe Withdrawal Rates.

Juicy Excerpt: So lowering the stock allocation and increasing the TIPS allocation can increase the safe-withdrawal-rate dramatically. Many investors would not feel comfortable going with a 100 percent TIPS allocation even in the circumstances that applied in early 2000. But even a shift to a 50 percent TIPS allocation would have pushed the safe withdrawal rate up to 3 percent real. (and pushed the reasonably safe withdrawal rate up to 3.4 percent real). Investors are often shocked to hear that the safe withdrawal rate can drop to as low as 1.6 real (this truly is a hard-to-believe number when you consider that stocks earn an average long-term return of 6.5 percent real). It can come as a comfort for them to learn that they have the reasonably appealing option of increasing their TIPS allocation by 30 percent and thereby increasing their safe withdrawal rate by 1.4 percentage points (or by 1.8 percentage points if they are can live with a 20 percent chance that the retirement will fail).

I’ve posted Entry #362 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Stock Market Is Only As Smart As the Investors Who Comprise It.

Juicy Excerpt: The problem with Buy and Hold, in my view, is that it assumes that the market as a whole is smart enough to get things right. The way to make smart decisions is to assume as little as possible but to instead always remain on guard against mistakes of all types. When a large percentage of investors comes to believe that the market cannot get it wrong, that’s when the market lets down its guard and gets it horribly wrong. For so long as most investors worry about valuations, the valuation level for the market as a whole remains reasonable. When most investors become Buy and Hold types, there is no longer any intelligence working to keep prices in check and prices rise to insanely dangerous levels.

I’ve posted Entry #361 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Investing Is In Some Important Ways a Community Act Rather Than an Individual Act.

Juicy Excerpt: There’s a funny scene in an episode of Mad Men that reminds me of an unfortunate phenomenon that applies among the stock investors of today. Don Draper and his wife and two kids are enjoying a picnic at a public park. When it is time to get back in the car and drive home, they pick up the things they want to bring back home and then pull up the blanket on which they and the food had been sitting, causing papers and napkins and boxes and other trash to get tossed onto the grass. They all smile as they walk back to the car, not one of them showing any concern that they have spoiled the environment with an act that all those watching through today’s eyes view as careless and lazy and selfish.

People did things like that in the 1960s. Environmentalism wasn’t a thing. People smoked in elevators and people told racist jokes in public and people (both men and women) assumed that a woman whom they had never met was more interested in finding a husband than in career advancement. Our ideas of how to interact with others in the community change over time. Things that at one time we think of as personal matters (“it’s my trash, I’ll do what I want with it”) come to be perceived as matters of community concern.

I think that we are going to see that change in perception take place in regard to our views on stock investing sometime over the next decade.

I’ve posted Entry #360 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called There Is No Floor on Safe Withdrawal Rates.

Juicy Excerpt: There’s another factor that Kitces ignores in his claim that the 4 percent figure is a floor. It’s not only valuations that determine the safe withdrawal rate. The other big factor is the return sequence that applies. Two different return sequences that produce the same long-term return do not necessarily produce the same safe withdrawal rate; one that takes more money out of the portfolio in the early years of the retirement will generally produce a smaller safe withdrawal rate because it causes the portfolio size to drop to dangerously low levels before the gains needed for it to recover come into play. The 4 percent figure comes from a time-period in which valuations were high but from a returns sequence that was on the lucky side; the reality is that retirements taking a 4 percent withdrawal and beginning in 1929 had only a 50 percent chance of working out (these retirements ultimately survived but they were not safe when they were initiated because we did not know at the time that a lucky return sequence would play out).

So even if valuations were no higher in 2000 than they were in the earlier times that produced the 4 percent number, it would not have been right to say in 2000 that a 4 percent withdrawal was safe. Calculations that take both factors (the valuations factor and the returns sequence factor) into account indicate that retirements beginning at that time and calling for a 4 percent withdrawal had only a 30 percent chance of surviving 30 years. Not safe!